Sunak beat the markets. Voters are another story

Suspension

Two epistles became famous in the political history of the United Kingdom for their frankness about the country’s dire finances. Reginald Maudling, the outgoing chancellor of the Conservative Party in 1964, told his successor and friend from the Labor party, Jim Callaghan, “Sorry, old Dick, to leave it that way.” In 2010, Liam Byrne, Labor’s chief secretary to the Treasury, made a mock apology to his Liberal Democrat successor, David Laws: “I’m afraid, there’s no money.”

Their jokes were hung around their necks by their opponents, but they both had the ring of truth. The governments that followed were beleaguered by the extravagance of their predecessors. Today’s opposition Labor Party should remember it as a warning.

With the Office for Budget Responsibility predicting that UK living standards will fall by 7% over the next two years (the biggest drop ever), the odds are that a Conservative election will be defeated within two years. The Office for National Statistics estimates that wage increases are easily outpaced by price increases and that the recession will continue for a year. And middle-income earners – many of whom are Tory voters – will bear the brunt of the tax increases he announced in Thursday’s fall statement.

Prime Minister Rishi Sunak, a former Goldman Sachs banker, has won the respect of markets for his fiscal conservatism, but is struggling with voters. He responds poorly when it comes to “keeping in touch” and “understanding the lives of ordinary people”. Perhaps we will see a few Prada shoes and expensive office wear. Personality is forever political. Sunak’s vast private wealth and ex-wife’s non-resident status (which exempted her from taxes on her overseas income) make the business tempting targets.

Sunak also lacks the charisma of former Prime Minister Boris Johnson with many ex-Labour voters who enjoyed his homage to the political class. These converts may return to their old allegiance in the next election. The Conservative Party is disappointed. Her favorite newspaper, The Daily Telegraph, asks what the point of voting for the Conservatives is if they raise taxes and avoid public sector reform. The Institute of Economic Affairs, the UK’s leading free market think tank, accuses the government of “managing the decline”.

If the Tories lose, Sunak’s no-nonsense Chancellor of the Exchequer, Jeremy Hunt, will not fall into the trap of writing a note handing his tongue to his likely successor, shadow chancellor Rachel Reeves, the former Bank of England economist. But the unspoken message will be the same: no money.

Labor’s recent 20-point lead in the polls has spring into the party’s stride, although an electoral victory cannot be taken for granted, given the large number of seats Labor would have to win for an outright majority. However, if they prevail, Reeves and her leader Keir Starmer will have to deal with the legacy of a demoralized Tory party. Hunt’s £55bn financial pressure has delayed several public spending cuts until after the general election expected in late 2024.

A center-left party that has historically supported generous public services will find that piggyback bank. How will the business make a difference if it can’t fund a growth strategy? Its ambitious Green Prosperity Plan, unveiled in September, which carries a gargantuan £28bn cost, looks weak in current economic conditions. Will Labor manage the decline too?

Long before any general election campaign is due, traps are being set for the Labor Party. Hunt could challenge Reeves to accept his plans or determine how she would find the money to reverse them. As Reeves herself noted in her blistering response to Hunt in the House of Commons, “The Tories want to party like it’s 2010.” That year Chancellor George Osborne slashed budgets and challenged Labor to say how they would balance the books. Osborne, not by chance, was invited back to Downing Street to give advice on how to play billiards on an opponent.

However, the last time Labor set an alternative budget – prior to the 1992 election – the party was defeated, despite weariness from 13 years of Tory rule. The Conservatives and their allies warned in the press of an impending “double tax hit” for the opposition and Labor had no answer.

Reeves and Starmer took a different path. Labor has trailed the Conservatives in economic efficiency over the past 15 years. Recent market turmoil has finally given them the lead in the polls, but that may only be temporary – the Tory prime minister’s package of unfunded tax cuts has thrown her out of office.

Labor’s Tony Blair and Shadow Chancellor Gordon Brown faced the same dilemma in the 1990s. The Tory government at the time was plagued by divisions, scandals and recent economic failure. But voters still need to be convinced their money will be safely in Labor’s hands, even as the vast majority want to spend billions rebuilding crumbling schools and hospitals.

Reeves chose to emulate Blair and Brown, vowing that the Labor government would not borrow to finance day-to-day spending. She even backed the Conservative Party lowering the base income tax rate before it was dropped a few weeks ago.

But there is a big difference between the Labor Party then and now. In 1997, the Conservatives Blair and Brown inherited sound finances in the midst of a long post-Cold War boom. Inflation was low and prices of manufactured goods were falling due to globalization. Today, globalization is in reverse, war is on Europe’s doorstep, and rising interest rates on government debt have left a black hole in the treasury accounts. The tax burden has risen to heights not seen since World War II.

We are much closer to Maudling’s faltering British economy and Bayern’s post-recession miserable post-recession. There is a glimmer of hope on the horizon in the Office for Budget Responsibility’s optimistic forecast for steady growth in 2025. But workers can’t count on that just yet. Most likely, there will be no “money”. The path back to power for the opposition party will be paved by poverty.

More from Bloomberg Opinion:

• The deathly silence of the UK budget on housing: Therese Raphael

• The UK can benefit from winning the World Cup – for the sake of the economy: Andrea Felstead

• The UK already has a bad wealth tax: Merryn Somerset Webb

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Martin Ivins is Editor of the Times Literary Supplement. Previously, he was editor-in-chief of The Sunday Times of London and its chief political commentator.

More stories like this are available at bloomberg.com/opinion

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